Odds Of Near-Term Price Gains Ahead For: Leveraged Long ETFs

Includes: FAS, SPY, SSO, TNA
by: Peter F. Way, CFA


Forecasts of coming price ranges by market pros for the best of these ETFs have won profits in 90% of 101 cases over the past 5 years.

They provided wealth-building outcomes at annual (CAGR) rates of 55% , earned in typical 8-week compounding holding periods.

Worst-case price drawdowns while held averaged only-13%, a reward-to-risk ratio of better than 4 to one.

These Active Investment Management actions compare to same period buy&hold passive market price return CAGRs in SPDR S&P500 ETF SPY of 13%, worst drawdowns of -4%.

Looking for Winners? Skip to Figure 6. Concerned over a holding? Check if it is in Figures 2, 4, 6. Details in 3, 5.


This is an analysis of securities prices, not of the underlying economics behind the securities themselves. It draws from the informed, rational behavior of major investors as they adjust their holdings in multi-million dollar block trades, and the assistance provided them by the sell-side of the street market professionals in the block-trading community.

Here is how their prices moved in the past 52 weeks

Figure 1

source: Yahoo Finance

Here is how market pros see them likely to move soon (3 months).

Figure 2

source: blockdesk.com

Those upsides are implied by Market-Maker [MM] hedging deals to protect firm capital put at risk while aiding big-$ fund portfolio manager clients adjust their holdings.

Here are the specifics of their forecasts, with averages for the group and for market-index ETF SPDR S&P500 (NYSEARCA:SPY).

Figure 3

source: blockdesk.com

Average price range size of 24% in ~3 months marks these securities as potentially volatile and not suitable as buy & hold items.

But they do present attractive gain prospects, averaging targets 14+% higher, a Reward prospect. Against this a Risk exposure can be compared. It is the risk of the worst price drawdowns each issue encountered in the 3 months following prior forecasts like today's.

The nature of their leveraged structures produces prior risk exposures averaging -13%.

Not only for the stocks/ETFs in the subject group, but at the bottom of the figure also an average of the group's forecasts, and an average of SPY, the SPDR S&P 500 Index ETF as an indication of a "market" average outlook.

Their reward~risk co-ordinates are what is mapped in Figure 4.

Figure 4

(used with permission)

In the map, good is down and to the right. The diagonal is equality of risk and reward, with uncertainty increasing as it rises. Risk and reward, while of prime concern, are not the only considerations driving capital investment commitments.

Odds for profit and size of payoffs also impact choices. Here is how they and some other considerations, drawn from the experiences of prior forecasts like today's, may be of influence:

Figure 5

source: blockdesk.com

These are qualitative details, of passing interest for some investors, given the impact of their shorter-term presence in a portfolio of 50 to 100 issues being turned over 5 to 10 times in a year. For others earlier in the wealth-building process, perhaps holding only a dozen names initially, their proportions of influence on the overall portfolio, even when briefly held, are worth more intensive consideration. Given the compounding effect of repeated commitments in a year, that proportional holding presence is even more important.

The columns of Figure 5 are numbered ( ) to simplify their identification when in combination with one another, or describing their role in the comparative evaluation and capital commitment process of selecting holding choices.

The (2) Range Index [RI] is a measure of the proportions of price change prospect seen in the current MM forecasts of near-term likely price extremes seen, as presented in Figure 2. Its RI value is the percentage of the whole forecast range that lies below the current price. It is a sort of common-denominator "price-tag" for the security's profit prospect, in terms of the potential price drawdown exposure that may have to be endured in attempting to capture the upside.

A zero RI occurs when the current market quote is at the bottom of the forecast range, 100 signifies the forecast range-top market price presence. There are a few red 130 values used as a method of identifying when current information for some reason is outside of our forecast quality control limits, and the most recent qualified forecasts are being shown on a "better than none" basis. We tend to exclude such situations from any commitment comparison conclusions.

The remaining columns are all averages of prior daily forecast samples having similar-level RIs during the past 5 years. Their sample size and total available forecast counts are in (7).

The samples have been subjected to the TERMD portfolio management discipline. In it a holding is acquired at a cost of the closing price of the subject on the next day after the forecast, and is sold on the first closing day occurrence of a price at or above the top of the forecast range. If that has not occurred by the 63 rd market day (3 months) after the forecast, the holding is sold regardless of price gain or loss, to be immediately reinvested in a best available choice at the time, as would it be after reaching a sell target.

TERMD provides a directly-comparable standard of relative investment performance which includes both risk and reward components by recording what the average worst-case price drawdowns have been during the periods when positions were actually held. That statistic is shown in Figure 2, and is the risk component in the Reward~Risk Tradeoff map of Figure 3.

Another dimension of the risk component is how often a price-drawdown remains at the 3-month ends of holding periods. Stated in positive terms, its complement is the Win Odds of (3). The profitability impact of such losses is included in the net % Payoffs of (4).

The ultimate price performance measure (6) of Compound Annual Growth Rate [CAGR] involves both time (5) and Payoff (4). Because of the powerful influence of (5) time in (6), the credibility of forecasts (8) is taken as what proportion of the upside price prospect shown in Figure 2 and comparison-mapped in Figure 3, has actually been delivered by the similar prior sample forecasts.

This (8) is a key qualitative dimension, voided by non-current red (2)s, and impacted by (3). The ratio of forecast reward to experienced risk mapped in Figure 3 is quantified by the ratio in (9).

Everyone has his/her own balances of importance in these considerations. Think about where yours are.

A figure-of-merit [fom] combining odds, payoffs, availability, risk, is calculated to provide an arbitrary "score" for each security. They are compared for the line items in Figure 5 as a bar graph in Figure 6.

Figure 6

source: blockdesk.com

Then compare any issue's details with the group's averages, and the averages of ~2500 other issue forecasts, shown as blue rows at the bottom of Figure 5. "Market" averages via SPY forecasts are also offered as a norm.

In this group comparison, at this date, the Leveraged Long ETFs average show a higher price relative to forecast expectations (RI of 39 in {2}) than the population average of only 31, while the big-cap market index ETF of SPY is now up to 38.

On the plus side, the Leveraged Long group Win Odds average at 74 (nearly 6 out of 8) is much better than the population's 62 (a 5 out of 8 result) or the SPY achievement of 67 (4 out of 6), but not as good as the current top 20 ranked stocks and ETFs of the population's 2,630 issues. Its average is nearly 7 out of 8 (actually 17 out of 20).

But the big differences show up in (4), where achieved % net payoffs of the top-ranked 20 out of the population delivered +13% net gains from prior forecasts similar to today's, compared to the overall population's net payoffs of only +2.8% and the Leveraged Long ETF group average of +4.8%. SPY also-ran, at +2.7%.

Those % payoff differences are further magnified by their holding periods as the ETF group's commendable +4.8% is magnified to a CAGR of +55%, about four times SPY's +13%. The top 20's away out front prior payoffs expand enormously to a CAGR of +110%. These are history of achievements past, not forecasts. (Each day's 20 list is subscribe-able as market-pro "Intelligence" at blockdesk.com.)

Also of interest is the otherwise concealed nature of performance differences in the overall forecast population. The number of loss-producing issues, more than half, and the size of their losses, compared to the size of winners, reveals a net negative in the credible ratio in (8) for the overall population. It's a minefield out there, suggested by the barely break-even reward-to-risk ratio of 0.3 in (9). And while SPY's % payoff history is unexciting, so is its risk exposure, only half of its reward prospect.


Figure 6 suggests the better choices on an arbitrary standard of quality factors integrated the way we put them together in fom (maybe not your way) would be the Direxion Daily Financial Bull 3X ETF (NYSEARCA:FAS), the ProShares Ultra S&P500 2x ETF (NYSEARCA:SSO), and the Direxion Daily Small Cap Bull 3x ETF (NYSEARCA:TNA).

But by stepping away from a choice focus restricted to Sector ETFs, we see 20 other stocks and ETFs currently available from the broader population with far more attractive wealth-building potential than most in the Leveraged Long ETF group.

Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information, earlier helping professional investors and now individual investors, discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.

We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for D-I-Y investor guidance what the arguably best-informed professional investors are thinking. Their insights, revealed through their own self-protective hedging actions, tell what they believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided. Our website, blockdesk.com has further information.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FAS over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.